Locked out: How a buy-to-let boom has transformed the mortgage market for a younger generation of buyers

As Financial Mail reveals that banks now lend more to landlords than to people living in their own homes, young families describe how they are battling with high and rising rents – yet, somehow, they still dream of buying.

Though property prices have fallen across most of Britain since their 2007 peak, many young adults are still struggling to buy a home of their own. The 2008 banking crisis virtually turned off the tap of mortgage cash for borrowers with only a small deposit.

Today, though some lenders do offer special ‘first-time-buyer’ deals, these loans are costly and difficult to obtain.
The result is that even more younger families have been forced into renting, driving up rents and fuelling a resurgence in buy-to-let.

'Injustice': Tom Sears, with wife Louise and Luna, says if he had been less prudent and borrowed as much as possible they would be better placed today

Financial Mail’s analysis of lending
data has found that banks and building societies are lending more new
money to landlords than to homeowners.
A younger generation is increasingly frustrated.

Matt Griffiths is a volunteer for online lobby group Pricedout (pricedout.org.uk), representing the interests of younger, professional couples and families hoping to buy.

‘Young buyers have never faced
stiffer headwinds to home ownership,’ he says. ‘It is beginning to dawn
on people that this isn’t a temporary blip.

For many young professionals,
particularly those in the South East, it looks like permanent
exclusion.’ He says one reason is the failure to build enough homes.
Another is the rush by wealthy landlords to add to their portfolios and
capitalise on rising rents.

‘Unfortunately, the housing market now has a powerful momentum acting
against younger home ownership,’ Griffith says. ‘Prices remain sky-high
relative to wages and the banks’ withdrawal of credit means the
equity-rich are able to muscle out others.

‘Ownership among the under-35s is in free fall. This is in stark
contrast to our parents’ generation where an initial struggle to get on
the ladder, combined with hard work, was rewarded with a family home and
garden.

‘Today those who have bought often find themselves trapped in a small
flat with little chance of moving, while those who haven’t bought seem
to be left permanently renting. People are entering their second decade
of well-paid professional work with precious little to show for it.’

Software engineer Edward Spencer and
his girlfriend, Kate Haighway, live in a one-bedroom flat in Reading,
Berkshire, that they rent for £750 a month. Kate is a geography teacher
at a secondary school so both have good wages and can save. But high
house prices make the move into homeownership extremely difficult.

Prices in Reading have risen six per
cent since 2008, according to property website Zoopla, with a current
average asking price of £325,000. Edward says he and Kate, both 26,
would need to spend more than £200,000 to buy something comparable with,
or better than, their small rented flat.

‘We said let’s try to save £20,000, and after three years we’re
approaching that,’ he says. ‘But now I realise we probably need more.’

With a £20,000 deposit, some lenders
would offer them a £180,000 mortgage (90 per cent of £200,000), but even
at the best possible rate – 3.84 per cent from HSBC – monthly payments
would be £934. And this rate is variable, so it could rise at any
moment.

Given the current low rates and the
emerging trend among banks to increase their standard variable rates,
Edward and Kate might wish to fix their rate. But to fix for two years,
also with HSBC, would mean monthly payments of £1,040 while the best
five-year fix available is from Leeds Building Society at £1,159 a
month.

If they had £50,000 to put down – or 25 per cent – they could get a
best-buy three-year fixed rate of 2.99 per cent from Yorkshire Building
Society, where their monthly payments would be £710, less than they pay
in rent.

Edward says: ‘We’re both from
families where everyone owns their homes and it’s what we want for
ourselves eventually, but at the moment we continue to rent.

‘The older generation don’t
understand our difficulties. My father kept saying to me, ‘‘Go and talk
to the bank.’’ It was only when I got on to the internet and showed him
today’s price of a property on the street where I grew up, and which we
sold in the late Nineties, that he fully understood how expensive
housing has become. The modest house we sold for about £250,000 in 1997 now costs £800,000. He was gobsmacked.’

Martin Quinn, 37, a salesman for a
financial data firm in London, rents a two-bedroom bungalow in
Wallington, Surrey, for £935 a month. He and his wife, Jennifer, have
just had their second child, which means the £500 they were previously
able to save each month is spoken for.
Their landlord has asked them to leave because the property is to be
sold.

Martin estimates that local rents
have risen by ten per cent over the past year, so that a similar house
would now cost more than £1,000 to rent.

‘A bigger property will cost us £1,200 a month,’ he says. ‘Buying is
simply not an option. Before the children came along, in 2006 or 2007
when banks were lending, we could have stretched ourselves and found a
mortgage.

‘People who bought at the peak of the market, often with little or no
deposit, are now paying very little each month on their mortgages – a
fraction of what we’re paying in rent. Those who borrowed excessively
are being rewarded for their recklessness.’

This view is shared by many. It is
lent weight by recent research, previously published in Financial Mail,
showing that it now costs more to rent than to pay the average mortgage
on the same property in 47 out of the 50 biggest towns and cities. The problem is especially acute in London and the South.

Housing charity Shelter reported last
month that two-thirds of the capital’s renting population believe they
will never be able to afford to buy in their neighbourhood.

Tom Sears, 29, works for the family
drinks firm in Poole, Dorset. His mother lives abroad and Tom rents her
home with his wife, Louise, also 29. He could not afford to buy in
Poole, where properties cost an average £261,000 – and that is after
having fallen 13 per cent since 2007.

‘I don’t blame banks for not wanting to lend to people with smaller
deposits,’ he says. ‘House prices might fall more, and it’s obvious a
25 per cent deposit is safer than ten per cent.’

But Tom highlights an unfairness.
‘You cannot help but feel a sense of injustice,’ he says. ‘We were
always told to be prudent and save. But if I had not been prudent and
had borrowed as much as I could, I would be a lot better off today.’

Apart from the problems of being
squeezed between high rents and high house prices as well as a lack of
mortgage finance, there are further problems for Britain’s growing army
of young renters.

Allegations are growing that
landlords are increasingly exploiting tenants. Shelter is petitioning
the Housing Minister, Grant Shapps, to increase the safeguards for
tenants and impose heavier penalties on rogue landlords.

Landlord organisations claim most of them are fair, long-term and
responsible. But evictions are increasing. Legal data provider Sweet
& Maxwell says landlords brought 14,895 possession orders before
county courts in 2011, a jump of almost 20 per cent on 2008.

... but buying is still possible if you steer clear of big cities

The relationship between earnings and house prices differs widely throughout the country, making some areas far more affordable for first-time buyers than others.

Farewell to renting: Faye and Chris Flaherty

London and the South East and cities such as Edinburgh, Bristol, Leeds and Liverpool remain beyond the reach of many buyers. But elsewhere thousands of young homeowners are saving and buying without the help of parents.

Faye Flaherty and her husband Chris, both 28, completed on a three-bedroom end-of-terrace home in Walsall, West Midlands, two weeks ago. The property cost £85,000 and the couple, who were previously renting in the area and paying £525 a month, had saved a ten per cent deposit on their own. They borrowed £76,500 from Santander on a two-year fix at 5.49 per cent, giving monthly repayments of £462.

‘We’ve been renting for just over ten years,’ says Faye, who works in customer service for an insurer. ‘It’s a milestone for us – my mother came over with champagne last weekend.’ Does Faye worry that prices might fall? ‘It’s a bit of an anxiety,’ she concedes, ‘but we will be better off each month, and we can save.’

David Hollingworth, of broker London & Country in Bath, Somerset, says: ‘The number of deals available for borrowers with small deposits has grown consistently since the middle of last year and this increased competition is improving rates. Some lenders are clearly committed to first-time buyers.’

Top deals available for those with only a ten per cent deposit include loans from HSBC (4.89 per cent fixed for two years, fee-free) or a five-year fixed rate from Leeds (5.99 per cent, with a fee of £199.)

Skipton Building Society will lend to those with only five per cent to put down, but the rate is 6.29 per cent fixed over five years with a £195 fee.

A number of loans allow young adults to use their parents’ homes as security, meaning a smaller deposit. Lloyds runs its Lend a Hand scheme, while similar loans are offered by Bath and National Counties building societies as well as new lender Aldermore.

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How a buy-to-let boom has transformed the mortgage market for a younger generation of buyers